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Financial Modelling in Practice
A Concise Guide for Intermediate and Advanced Level
Michael Rees (Author)
9780470997444, Wiley
Hardback, published 24 October 2008
292 pages
25.2 x 17.5 x 2.2 cm, 0.744 kg
Financial Modelling in Practice: A Concise Guide for Intermediate and Advanced Level is a practical, comprehensive and in-depth guide to financial modelling designed to cover the modelling issues that are relevant to facilitate the construction of robust and readily understandable models. Based on the authors extensive experience of building models in business and finance, and of training others how to do so this book starts with a review of Excel functions that are generally most relevant for building intermediate and advanced level models (such as Lookup functions, database and statistical functions and so on). It then discusses the principles involved in designing, structuring and building relevant, accurate and readily understandable models (including the use of sensitivity analysis techniques) before covering key application areas, such as the modelling of financial statements, of cash flow valuation, risk analysis, options and real options. Finally, the topic of financial modelling using VBA is treated. Practical examples are used throughout and model examples are included in the attached CD-ROM. Aimed at intermediate and advanced level modellers in Excel who wish to extend and consolidate their knowledge, this book is focused, practical, and application-driven, facilitating knowledge to build or audit a much wider range of financial models. Note: CD-ROM/DVD and other supplementary materials are not included as part of eBook file.
Background, Objectives and Approach xv About the Author xix Acknowledgements xxi 1 Building Blocks: Selected Excel Functions and Tools 1 Core Functions for Financial Modelling 1 Arithmetic Operations 1 Logical Operations 3 Financial Calculations 6 Database Functions, Features and Pivot Tables 12 Statistical Functions 16 Lookup and Reference Functions 20 Text Functions 29 Information Functions 33 Array Functions, Formulae and Matrix Calculations 35 GoalSeek and Solver 40 The Analysis ToolPak and Other Add-ins 43 The Analysis ToolPak 44 Selected Excel Short-cuts 47 2 Principles of Modelling 49 What is a Good Model? 49 Model Design 50 Selection of Model Variables and their Dependencies 50 Hyper Sensitivity to a Variable 55 Level of Detail or Aggregation 55 Model Structure and Planning 60 Logical Flow 60 Compactness 62 Named Ranges 64 Circular References 69 Model Building 74 Formatting and Comments 74 Creating Robust Formulae 78 Results Presentation and Other Uses of Sensitivity Analysis 85 General Remarks on Presentation 86 Using Data Tables to Conduct Sensitivity Analysis 86 Hiding and Protecting Models 92 Model Auditing 94 3 Financial Statement, Cash Flow and Valuation Modelling 99 Financial Statement Modelling: Core Points and Example 99 General Comments 100 Income Statement Forecasting 102 Balance Sheet Forecasting 107 Cash Flow Statement Forecasting 110 Error Checks and Feasibility Checks 111 General Error Checking Tools 111 Feasibility Checking and Ratio Analysis 113 Adding Generality 116 Cash Flow Valuation 120 Calculation of Free Cash Flow 121 Discounting Free Cash Flow 121 Terminal Value Calculations 124 Further Adjustments 128 Sensitivity Analysis 129 4 Risk Modelling 133 Benefits and Challenges of Risk Modelling 133 The Risk Modelling Process 135 An Introduction to Simulation Techniques 136 The Language of Probability Distributions 137 Quick Guide to using @RISK 142 Types of Dependency Relationships in Risk Models 144 The Selection and Use of Distributions 147 Pragmatic Approaches and Distributions 148 Data-Driven Approaches and Distributions 153 Scientific Approaches and Distributions: The Basics 155 Further Aspects of the Science of Distributions 163 Further Example Models 167 5 Introduction to Options and Real Options Modelling 181 Financial Market Derivatives: An Introduction 181 Real Options Modelling 188 Uses and Relationships to Other Types of Analysis 189 6 VBA for Financial Modelling 203 Introduction 203 The Bare Essentials 204 Simple Examples 208 Building Blocks 212 Working with Ranges 212 Writing Robust Code 220 Further Topics 224 Object Orientation: An Introduction 224 Controlling Execution and Related Topics 227 Working with Functions 230 Checking and Debugging Code 232 Examples: Recording Macros and Related Topics 235 Introduction 235 Using GoalSeek and Solver 237 Examples: Simulation Modelling 240 Introduction 240 Examples: User-defined Functions 243 Creating Functions 243 Examples 244 Structure and Organisation: Further Topics 248 Further Reading 253 Index 255
Subject Areas: Finance & accounting [KF]
